Help to Buy, for all its good intentions, is a rather confusing system. Firstly, you have the Help to Buy Equity Loan
, introduce in 2013, where the government will subsidise 20% of your property price to allow you to buy a new build home with a 5% deposit. Then you have the Help to Buy ISAs
, which are nothing to do with the equity scheme, except that they also aim to help first time buyers, and these were launched in 2015.
The Help to Buy Equity Loan
For a young couple looking at their options, a Help to Buy Equity Loan can originally look like the answer to a big problem: how do we get on the ladder with a low deposit? With the cost of property ever increasing along with the cost of living, and wages not keeping up the pace, it will take the average first time buyer couple six years and three months to save up a 15% deposit. If you’re single, it will take an average of 11 years and three months.
So the chance to buy a property with only 5% deposit
suddenly seems like a lifeline. The government will give you the 20% interest free for 5 years (beyond paying £1 a month as an account fee) and then you start paying interest at a rate of inflation. You can start paying off your equity loan interest monthly or yearly, and the actual loan repayment will be taken from the sale of your property (at a percentage of the value, remember, so you may end up paying back more than you borrowed if the home increases in value).
But let’s look at how you apply this practically – you have a 5% deposit. You get a 20% top up from the government. That leaves a standard mortgage (which is not allowed to be interest only) for 75%. So far, so good. But you cannot get a mortgage for more than 4.5 times your combined yearly salary. In theory, according to the scheme, the homes can be worth up to £600,000. And yet, if you only have a 5% deposit saved, what’s the likelihood you’re going to be on a really high annual income? So the question is – will this scheme let you get the home you want?
Well, that depends. Firstly, the scheme only applies to new builds
, and only certain developers have signed up. That means if you’ve got your heart set on a certain area, you may be in trouble. Secondly, new build homes are often more expensive for the same square footage, location and type of property. That makes sense, they’re brand new and often kitted out with beautiful kitchens and have allocated parking. But what if you wanted a two bed house instead of a one bed flat? There’s a significant jump in price. Plus, the resale value of new builds is not as high as other property types. And whilst you’re getting help from the government on this, if you’re trying to buy a new build in the south of England, or in London
, you’re likely to find that the 75% mortgage you need is either hard to get on your wages, or is going to leave you with very high mortgage repayments. And remember that after the five years, you’ll be paying back the government loan. Starts to sound a little less helpful, doesn’t it? And remember, you won’t be allowed to make any changes to your new property either.
So who is most likely to benefit from the Help to Buy Equity Loan Scheme? Those with a high annual income, but low savings, and those buying in cheaper areas.
The scheme is not limited to first time buyers, so as long as you sell you previous home before using the scheme, you can take advantage of the equity loan. Here’s where the scheme really seems to benefit – considering that most new build plots have 3 and 4 bedroom houses, and you can put down more than 5% if you want to, people can put down a decent deposit, take advantage of the 20% equity loan and lower the mortgage payments each month. But those people are unlikely to be first time buyers.
The Help to Buy Equity Scheme offers a chance for those with a low deposit to get on the ladder with a brand new home. However, with limited developers offering it, and the varying prices across the country, it is going to benefit those who either have a high annual income but are not very good at saving, or those living in the north of the country. According to Which?,
the biggest Help to Buy uptake areas have been Leeds, Central Bedfordshire, Durham, Wakefield and Bedford, with the average price of a home being £226,887. Those hoping to buy south of the country may struggle to find a new build home around that price.
Help to Buy ISA
The Help to Buy ISA
is a separate entity, but can be used in conjunction with the Help to Buy Equity Scheme. This is a savings ISA with a higher rate of interest, where for every £200 you save, the government will put in £50, up to a total bonus of £3000. You can only put in a maximum of £200 a month, (though you can put in a lump sum of up to £1200 when you open the account) and the bonus will only be payable when the money is released to your solicitor
for your property. It cannot be used for anything else. You can also be penalised for taking money out of the account.
Free money, sounds great. But there are a couple of sticking points. With only £200 a month into the account, if you didn’t have the money to put in a lump sum when you opened it, to get the total £3000 bonus, it would take you 5 years to save up enough. Great if you’re not really planning to buy a property now, and just want to start thinking about it, and putting a manageable amount away every month. Not so great for those really working on saving as much as they can and moving sooner rather than later. An advantage is that if you’re saving with a partner, you can each have an account, and each get a bonus.
However, what hasn’t been clear to some of those signing up is that you will only get the bonus if the property you are buying is £250,000 or under (or £450,000 in London). So again, we return to geography. Those first time buyers hoping to stay in the expensive cities
they are renting in are not going to be able to use the scheme. Another issue might be that in the five years it takes to make the most of the account and get the full bonus, house prices may have gone up in your area.
If you’re aiming to buy in an area where the properties are under £250,000 and you’re not in a rush to save, or wouldn’t be able to save more than £200 a month, then the Help to Buy ISA could be a really great option to get free money just for saving. Even if you don’t end up using the ISA for a deposit (there is no reason you have to) you can still take advantage of a good interest rate, but not the bonus.
We’ve found that not a huge amount of our users are taking advantage of Help to Buy ISAs. 68% of our London users were first time buyers, but only 9.8% of them had a Help to Buy ISA.
Help to Buy ISAs had even lower uptake in the Home Counties, South of England and East of England (8% and below). The biggest uptake for Help to Buy ISAs was in Northern Ireland, North West England and Scotland, even though the percentage of first time buyers was roughly even across the country.
There is a clear relationship between those using the Help to Buy ISAs and being in areas where properties below the threshold are more available.
Following on from this, when you consider that the average age of a first time buyer
in the UK is 30, buyers may not want a small one bedroom ‘starter’ home. They may prefer to take the long view, choosing two bedroom homes if they are considering starting families. For a lot of these people, a £250,000 limit outside London is not going to buy a two bedroom property that fits their criteria. Even with the London increase to £450,000, those searching for enough space for a family in the capital would struggle. So is the Help to Buy ISA really helping as many people as it could be?
How best to help first time buyers?
Help to Buy schemes are very much needed, and the government focus on building new homes, as well as attempting to give first time buyers a chance to get ahead of the rising deposits needed is a great step. However, the issue of price disparity has been raised before – London is often given exception, with the Help to Buy Equity offered as 40% instead of 20%, and yet places that are very similar in price (Brighton, Cambridge) do not have a similar break. Creating regionally dependent plans would be very complicated, but would probably serve first time buyers across the UK more fairly. After all, £10 billion between 135,000 first time buyers doesn’t go very far.